CRR could turn a bone of contention

A fresh storm may be brewing ahead of the December 14 RBI board meeting with the central bank suddenly saying CRR cut is not under the ambit of monetary policy committee (MPC) and it does not see the need to use the cash reserve ratio as a tool for liquidity management, a stand and statement that may not go down well with North Block mandarins.

The MPC panel, as the RBI sees, has the mandate look into rate of interest and inflation management. A source said the RBI might have been wary of giving a signal that it is changing its monetary stance through a CRR cut. The central bank is rather using instruments that will give industry and banks short-term control over liquidity without in any way compromising on the monetary stance.

Though disappointed with the CRR cut not happening, the finance ministry has not officially reacted to the RBI governor’s statement that ‘CRR is not in the ambit of the MPC. Don’t see the need to use the CRR as a tool for liquidity management. The mandarins, however, feels this was a way to avoid providing banks more liquidity through a tool that was indirectly favoured by the government.  In a late night limited response to the MPC policy decision, Subhash Chandra Garg, secretary, department of economic affairs, just said in a statement, "The assessment of MPC for growth and inflation outlook is consistent with that of government assessment.”

A section of the market was lobbying for a cut in CRR.

While Garg did not comment on the RBI's promise to increase open market operation (OMO) purchases and statutory liquidity ratio (SLR) cut as possible way to increase liquidity, he said, "The government notes RBI's decision to maintain the policy rates. The policy stance probably required calibration."

On the RBI reducing SLR to 18 per cent from the current 19.5 per cent over six installments from January 2019, Garg said, "While this will have some implication for government securities, the reduction in oil prices and reversal of foreign flows has resulted in further moderation of yields."

A one percentage cut in CRR, which is the portion of deposits maintained by banks with the RBI, from the current level of four per cent would have released around Rs 1.2 lakh crore into the banking system. A CRR cut would have a much quicker impact on lending rates. The RBI has opted for to continue to use open market operations (OMO) and longer-tenure term repos to calibrate overall liquidity.

The RBI board, in its November 19 meeting, did not consider any proposal to boost liquidity for the non-banking financial companies (NBFC) sector despite a strong pitch by the government nominees.